ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the EdTrend Holding Inc. third quarter 2022 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star 1. Thank you. During the course of the conference call, ADTRAN representatives expect to make forward-looking statements that reflect management's best judgment based on factors currently known. However, these statements involve risks and uncertainties, including the continued spread and the extent of the impact of the COVID-19 pandemic. the ability of component supplies to align with customer demand, the successful development and market acceptance of our products, competition in the market for such products, the product and channel mix, component costs, freight and logistics costs, manufacturing efficiencies, our ability to effectively integrate mergers and acquisitions, and other risks detailed in our annual report on Form 10-K, for the year ending in December 31st, 2021, and our quarterly report on Form 10-Q for the quarter ending June 30th, 2022. These risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during the call. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of AdTrend Holdings. Sir, please go ahead.

Thank you, Brent. Good morning, everyone. We appreciate you joining us for our third quarter 2022 earnings conference call. With me today is AdTrend Holdings CFO Mike Foliano. Following my opening remarks, Mike will review the quarterly financial performance in detail, and then we will take any questions that you may have. Q3 marked a new era for AdTrends. following the closure of the business combination agreement with ABDA Optical Networking on July 15th. This transition point is timely as it coincides with our industry continuing a rapid transition to the fiber everywhere era, especially in AdTrans highest growth regions in the U.S. and in Europe. Service providers have aggressive goals to rapidly deploy fiber to homes, businesses, and critical infrastructure sites while increasing customer satisfaction, streamlining operations, reducing energy consumption, and ensuring network security. Our vision is clear. We want to help service providers achieve these goals by having the most complete portfolio from optical core to the customer prem. This portfolio includes scalable, secure, and efficient networking infrastructure and customer premise platforms paired with best-in-class software. These solutions maximize subscriber experience while simplifying operations through automation. The combination with Adva provides us with the most complete portfolio to execute on this vision. Given that this is our first quarter of combined results with a full quarter of results from AdTrend, Inc., and a partial quarter from Adva, we have adjusted the revenue categories to reflect our broader fiber networking portfolio. The new revenue categories for both products and services are subscriber solutions, access and aggregation solutions, and optical networking solutions. These categories cover our complete portfolio of fiber networking products and services that span from the optical core network to the customer premise network. A more detailed breakdown of these categories is provided on our investors' website. As for integration planning, this process is well underway. We are on target, and the two companies remain excited by the customer reactions to the business combination. Looking at the results for the quarter, a key few points stand out. For one, we are very balanced geographically with our U.S. and non-U.S. business each contributing about 50% of the total revenue in the quarter. Second, each of our product categories along with our consolidated service offerings contributed meaningfully from a revenue perspective, highlighting our continued diversification across our combined portfolio. We believe this well-balanced and comprehensive fiber networking portfolio coupled with our strong global presence will continue to provide us with higher growth potential in this ongoing investment cycle in fiber networks. Our success in the quarter was driven primarily by a diverse mix of service providers that are upgrading their optical transport networks, deploying new fiber access networks, connecting residential and business subscribers to these fiber networks, and upgrading to multi-gigabit capability in-home Wi-Fi networks. Our strongest revenue contribution came from the U.S. and Europe, as expected, where operators continue to invest heavily in fiber networks and where we have a strong presence. Taking a closer look at the combined portfolio, let's step through each category of our portfolio and look at the key areas of investment and growth drivers. Starting with our optical network solutions, we see broad-based demand and a growing backlog for ADVIS optical transport solutions with a mix of service providers, internet content providers, government agencies, and large-scale enterprise customers. Demand remains strong from large-scale transport systems to to internally developed optical modules and pluggable transceivers. This category has several exciting developments, especially in the metro edge, with a mix of optical modules, advanced security solutions, and edge-optimized platforms that are an ideal complement to AdTrans fiber access and aggregation solutions. Building on our innovations in optical networking, ADVA recently announced the creation of ANS. a wholly owned but separate company to serve the increasing requirements for secure network infrastructure. The new legal entity specializes in secure transmission technology to protect highly sensitive communication networks from cyber attacks. ANS will collaborate with national security organizations to ensure end-to-end networking protection that meets the highest industry requirements, including safeguarding data against strikes from quantum computers. Moving to our fiber access and aggregation solutions, we continue to see great demand for our 10-gig fiber access platforms. In the latest industry market share report from Del Oro, Atran held the number two market position in North America and number three market position in EMEA for 10-gig pond aggregation port shipments. We are now pairing these fiber access platforms with industry-leading carrier Ethernet aggregation and network synchronization solutions from ADVA that will further enhance our ability to meet the fiber access and aggregation needs for all subscriber types. In the subscriber solutions category, we saw tremendous growth during the quarter. On the residential side, where the growth is the highest, we are benefiting from enhancements to our cloud-managed multi-gig mesh Wi-Fi 6 solution offering and the growing number of subscribers that are now connecting homes that were previously passed with our fiber access platforms. On the business side, we now have a much broader solution offering, ranging from carrier Ethernet edge devices and network virtualization solutions to enterprise class routers and switches. These solutions, which are also complementary to our residential offerings and aggregation solutions, help fuel additional growth in our subscriber solution segment. Incorporated into each of these product categories are software solutions, led by AdTrans Mosaic One SaaS platform. AdTrans SaaS customer base, which includes hundreds of service providers, is up 31% year over year. And this includes more than 100 plus service providers that have adopted the latest version of our Mosaic One platform. With a much broader portfolio and larger customer base in the combined company, along with expanding capabilities and AdTrans SaaS portfolio, we expect to further accelerate growth in this strategic area. Looking ahead, we have a lot of exciting developments in the optical networking space. The recently launched 100 ZR pluggable coherent transceiver is a solution that is an ideal match for AdTrans access and aggregation portfolio. by greatly reducing the cost, power, and space needed to deploy 100-gig connectivity deeper into the network for mobile backhaul, fiber access backhaul, or large-scale enterprise service delivery. In addition to the 100ZR, we also announced the AccessWave optical module, which simplifies deployment of 25-gig point-to-point services for mobile backhaul, mobile front haul, and enterprise service delivery. In the access and aggregation space, AdTrend is expanding its lead in open disaggregated fiber access platforms with a much anticipated launch of the SDX6330. This is the densest, highest capacity, and most energy efficient 10-gig fiber access platform in the industry and is well ahead of the competition in terms of scale, performance, cost, and expandability. On the subscriber side, Antred is having great success with its SDG series of platforms for Wi-Fi 6 and is expanding these solutions to incorporate Wi-Fi 6E and business class features for work from home and small business users. And the software space would continue to make great advancements in our Mosaic portfolio, helping service providers automate the management of both customer premise and network infrastructure, while providing end users with tools needed to maximize their service experience. With the combined company, we will be integrating the complete portfolio from the optical core to the customer premise under a seamless management environment with AdTrans Mosaic One platform. This will both improve subscriber experience and increase operational efficiency. The success we are having in these focus platforms along with the exciting innovations on our roadmap have us well positioned for further growth during this ongoing investment cycle in fiber networks. Our key regions in the US and Europe view fiber networks as critical infrastructure, and sizable public investments remain ahead to ensure their deployment. While supply chain issues continue to impact us, the outlook is improving. Given these factors, we remain very optimistic about our future. With this background, I will turn things over to Mike to provide a review of our financials. And then following Mike's remarks, we will answer any questions you may have. Mike?

Thank you, Tom, and good day to all. I'll cover our third quarter 2022 results and provide our expectations for the fourth quarter. Please note that this is the first quarter for AdTran Holdings, Inc., which includes the consolidation of the ADVA financials for a partial quarter beginning at the finalization of the business combination on July 15th. which affects year-over-year and quarter-over-quarter comparisons. Since this is the case, I will refrain from repeating the first-time consolidation effects when discussing year-over-year and quarter-over-quarter comparisons of our results. I will be referencing non-GAAP information with reconciliations to GAAP presented in our press release and supplemental financial schedules on our investor relations page at investors.adtran.com. The supplemental financial schedules on our webpage also provide certain information by segment and category, which I'll also be discussing today. ADTRAN's third quarter 2022 revenue came in at $340.7 million, up 147% year over year, and exceeded the upper end of our guidance range of $320 to $340 million. Inclusive of ADVA revenues, Our network solutions segment makes up 90% of revenues in Q3 2022 compared to 87% in Q3 of 21. Our services and support segment contributed 10% of revenues in Q3 2022 compared to 13% in the year-ago quarter. Year-over-year and quarter-over-quarter revenue increases are driven by our subscriber solutions category, which makes up 39% of revenues compared to 34% in Q3 of 21 and 46% in the previous quarter. The newly introduced technology category optical networking solutions includes the optical networking or cloud interconnect portfolio of ADVA and contributed 35% of revenues. Access and aggregation revenue share was 26% compared to 66% in the year-ago quarter and 54% in Q2 of 2022. On a regional basis year-over-year, domestic revenue grew by 85% and international revenue increased by 270%. Domestic and international revenues are split about equally with about 50% of our revenues each providing a more balanced business with an expanded portfolio and global footprint. Our customer diversity continues to be a focus with two 10 percent of revenue customers, one U.S. service provider customer, and one international service provider customer. Q3 non-GAAP gross margin was 38.1 percent, improving by 3.5 percentage points year over year and 1.7 percentage points sequentially. Increase in gross margin is due to an improved customer and product mix in the combined company and improvement in supply chain expenses partially offset by unfavorable currency developments. GAAP gross margin is inclusive of 25.5 million acquisition-related expenses, amortization and adjustments due to the business combination with ADBA. While we anticipate continued supply chain challenges, we remain focused on managing higher component costs, freight expenses, and expedite fees. Our non-GAAP operating expenses were $109 million, increasing by 116% year-over-year and 101% quarter-over-quarter. Operating expenses were 32% of revenues compared to 36.5% of revenues in Q3 2021. and 31.5 percent in Q2 of 22. Non-GAAP operating profitability was $20.9 million, which translates into a non-GAAP operating margin of 6.1 percent compared to negative 1.9 percent in Q3 of 21 and 4.9 percent in the previous quarter. The improvement in operating profitability was driven by higher revenue volume at more favorable gross margins. Other income on a non-GAAP basis decreased year-over-year and increased quarter-over-quarter. The decrease on a year-over-year basis was mainly driven by market-related losses and impairments in our investment portfolio and higher interest expense related to our credit agreements, partially offset by favorable realized foreign currency exchange fluctuations. Quarter-over-quarter improvement was mainly due to higher favorable realized foreign currency exchange fluctuations that offset higher interest expense and investment losses. The company's non-GAAP tax provision for the third quarter was an expense of $8.8 million, or 42% tax rate, primarily driven by the change in our annual estimated effective tax rate related to the closing of the business combination with ADVA during the quarter and the requirement to capitalize R&D expense in the U.S. beginning in 2022 and the subsequent effect on our valuation allowance. Closing out our income statement results, non-GAAP net income was $12.2 million and $7.7 million after adjusting for minority shareholder interest in ADVA. This results in EPS attributed to the company of 11 cents per share. The significant difference in non-GAAP net income of 12.2 million and GAAP net loss of 44.9 million is mainly due to purchase accounting adjustments, which also explains the significant difference in non-GAAP net income of 7.7 million and GAAP net loss of 41.9 million. after eliminating the minority interest. Turning to the balance sheet and cash flow statement, cash and cash equivalents totaled $111.1 million at quarter end. For the quarter, we used $36.8 million of cash for operations, mainly due to deal closure expenses and an increase in working capital. Net trade accounts receivable were $302 million at quarter end. resulting in DSO of 82 days compared to 91 days in the prior quarter. Net inventories were $416 million at the end of the third quarter, resulting in inventory turns of 3.1 compared to 2.4 in the second quarter of 2022. Both companies continue to carry a higher level of inventory and raw materials as we build supply to minimize further disruptions given the challenging electronic component market and extended lead times. Trade account payables were $276 million, resulting in a DPO of 71 compared to 100 in the previous quarter. Once again, Q3 was the first quarter, which includes ADVA financials for a partial quarter beginning at the finalization of the business combination, on July 15th. The fourth quarter, however, will be the first quarter that fully includes Advo Financials. Integration planning process is progressing well, and we have now aligned our earnings call schedules to coincide on the same day. We've also taken further steps in the integration of our combined IR efforts and will align our key performance indicators as we guide in the future. Going forward, we will provide guidance on revenue and non-GAAP operating margin, similar to the guidance measures provided by ADVA. Looking ahead at the final quarter of the year, the continuing effects of the COVID-19 pandemic, the ability of component supplies to align with customer demand, the book and ship nature of our business, the timing of revenue associated with large projects, the variability of ordering patterns, from our customer base, as well as the fluctuation in currency rates, and any additional required purchase accounting adjustments related to the ADVA merger may cause material differences between our expectations and the actual results. With that in mind, our fourth quarter 2022 revenue is expected to be between $355 and $375 million, and we expect a non-GAAP operating margin between 5% and 6.5%. Once again, additional financial information is available at ADTRAN's Investor Relations page at investors.adtran.com. Now I'll turn it back over to Tom, and we will take any questions that you may have.